Two working groups formed at i-Capital Institute are undertaking feasibility study to establish an investment and an agricultural development bank in Ethiopia. The agricultural development bank, if allowed, will also entail an agricultural insurance firm.
Based in Addis Ababa, i-Capital is a consultancy firm and organizer of the East African Finance Summit episodes.
While the investment bank study is fresh, the agricultural development bank study is a revisit of earlier studies undertaken by the Public Financial Enterprises Agency.
“Right now, we have two working groups examining the investment bank and the agricultural development bank,” Sewagegn Chane, researcher at i-Capital and CEO of the Public Financial Enterprises supervisory directorate at the Public Enterprises Holding Administration (PEHA), told The Reporter. Sewagegn has been working at i-capital for the past five years and he is organizer of the annual East African Finance Summit as a committee member.
PEHA has the authority to create new public enterprises in addition to administering the 36 existing SOEs. It can also make decisions on mergers and the demise of SOEs. Sewagegn’s department is currently in charge of the Development Bank of Ethiopia (DBE) and Liability and Asset Management Company (LAMC). The Commercial Bank of Ethiopia (CBE),Ethiopian Insurance Corporation (EIC),National Lottery Administration were also under his supervision at PEHA, before they were transferred to the Ethiopian Investment Holding (EIH) last May.
In particular, the need for establishing an investment bank arose following the government’s decision to create a secondary market.
“It is critical for our country that agricultural development banks and investment banks exist. The secondary market cannot function without an investment bank. We need to build an investment bank now that we are close to establishing a stock exchange,” Sewagegn said.
Essentially, investment banks underwrite stocks, connect IPOs and investors, and lead the stock market with real-time research output, among other things. Banks and other financial institutions, for example, are among companies expected to be listed on the stock exchange.
The investment banks will thoroughly evaluate the banks, as well as other IPOs, to determine the actual value of their shares and securities. This means that, unlike currently, IPOs, including commercial banks, cannot determine the price of their shares on their own, and that underwriters protect the interests of every stakeholder, investor, IPO, and others.
The stock market cannot function without the services of an investment bank. Simply put, an investment bank establishes criteria. However, the investment bank cannot be listed on the stock exchange.
The ideas for the agricultural bank, on the other hand, are not novel in Ethiopia.
The agricultural bank was proposed in two prior studies by the institution. In 2014, the institution performed the first “Proposal of reorganizing public banks.” The proposal also contained a recommendation about what should happen to the defunct Construction and Business Bank (CBB).
In 2018, the same experiments were adjusted for the Development Bank of Ethiopia (DBE).
When Parliament was debating the dismantling of DBE four years ago, the Public Enterprise Holding Agency was directed to conduct a study to determine its fate. At the time, the parliament considered dismantling DBE, after its NPL rose to 40 percent.
One of the study’s alternate recommendations was to divide the DBE into three policy banks: an independent industry bank, an agricultural bank, and an SME bank.
Finally, it was decided to reorganize and reform the DBE as is. While PEHA was conducting a study to rehabilitate DBE, the Agricultural Transformation Agency (ATA) was also moving to establish an agricultural bank.
The updated report in 2018 emphasized the importance of the Agricultural Development Bank and mortgage bank (construction bank). The objective is for the CBE to discontinue lending on mortgages and hand over the function to the new Construction Bank (CB).
In reality, the proposed CB partially replaces the now-defunct CBB. Nevertheless, rather than abolish the DBE, the government decided to restructure it by establishing industrial, agricultural, and SME banking at a vice president level.
This new structure within the bank allowed them to save DBE.
However, following the significant failures in Gambella and Benishangul, the government instructed the bank to suspend lending for rain-fed agriculture farming projects, emphasizing the significance of establishing an independent agricultural bank.
“I hope to see the development of an agricultural bank in Ethiopia. I’ve seen agricultural banks in numerous nations and wished Ethiopia had them. Ethiopia’s economy is based on agriculture. However, the economy is currently distorted because the service sector accounts for the majority of GDP,” Sewagegn explained.
Sewagegn argues that an agricultural development bank cannot be a substitute for transforming Ethiopia’s economy from agriculture to manufacturing.
“Agriculture is not developing because of a lack of funds. The agricultural bank would also require the services of an insurance company to cover the risks associated with the loans. The bank finances the farmer’s tractors, while the insurance company protects both the machines and the harvest,” Sewagegn added.
Among his key contributions to public funding in Ethiopia over the last decades, Sewagegn previously led teams that initially reviewed the establishment documents for Ethio-Re and the stock market. The stock market will be realized in eighteen months.
Previous studies, initially done in 2014 and updated in 2018, advocated for the importance of the Agricultural Development Bank.
The new working group will now re-examine it, conduct a status review, and make alternative recommendations. Stakeholders will examine the documents once the two working groups have completed their studies. The final documents will then be presented to the government.
The government has the option of rejecting or implementing the study’s recommendations.
Even if the government abandons it, Sewagegn believes it will be adopted at some point in the future.
“When we first researched and proposed the stock market’s importance eleven years ago, the prior administrations dismissed the idea. When Prime Minister Abiy Ahmed came to power, he quickly requested revised suggestions and approved the development of the stock market.”
“So our role is to research and hold off on making a recommendation to the government. The choice will be made. I really want the agricultural bank to come to fruition before I retire,” Sewagegn added.